Opinions

Alaska's fiscal solution? Use fund earnings, keep LNG project on track

For Alaskans, there is no good news out there on the economic front, it would seem. All the more reason to get serious about reforming our state's fiscal system before a collapse of the state budget risks pushing the economy over the brink.

At the rate we're burning though cash reserves that's about three years away. Some good news, however, is we can avert this if we act soon. The tools readily at hand are using some of the Alaska Permanent Fund's multibillion-dollar annual earnings and capping the annual citizen dividend, which by some estimates may exceed $2,000 this year.

That credit rating agencies put Alaska's credit on a "negative" outlook because of our fiscal paralysis should be a wake-up call. The lack of any progress on diversifying state revenues, and particularly not tapping Permanent Fund earnings and allowing the dividend to continue to grow were cited by rating agencies as reasons for the switch to a negative outlook.

Our key problem, of course, is oil prices have continued to dive contrary to expectations for a modest uptick by now. The governor and legislators have acted responsibly, making a start in reducing spending. It's now obvious, however, that budget cuts won't solve this problem – the gap is too big.

Taxes on citizens, like an income tax, would help but will be very contentious and in any event will take too long to implement. Fund earnings and trimming the dividend are the only practical options in the short term.

However, we need to be thinking also about how this problem can negatively affect our best long-range hope, which is the Alaska LNG project. Ideally, gas production could bring a couple of billion dollars a year into the treasury, but it won't happen until long after 2015. Everyone agrees keeping this project on schedule is vital but whether it can really happen is still open to question.

A revised cost estimate now being done as a part of preliminary engineering work is pretty important. By early next year we should know if the cost is in the ballpark. If it is, and the industry and state (which is a partner in the deal) can reach final agreement on terms, the project can move to final engineering sometime next year.

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That is a big step because it will be costly and will represent the first big financial commitment by the partners, including the state. I'm told very few projects that enter final engineering are not built. That's why the preliminary engineering is so important to the final agreement on terms among the partners.

A wild card in this is that if energy prices stay low for a while, which is now the accepted wisdom, even big companies may have limits on their financial capabilities, and committing to a huge project will be a huge gamble for the partners, including the state. Falling crude oil prices, to which LNG prices are typically pegged, are already disrupting some large LNG projects now in construction in Australia.

Although our project is a decade away, the construction decision has to be made in 2018 or 2019 and the decision on final engineering comes next year.

Meanwhile, here's the connection between our current financial problem and the gas pipeline: If the state's finances are in tough shape, we may not be able to finance our share of the gas project, at least on favorable terms.

If the state is broke, I can't imagine a financing scheme that would preserve our share of the project. That could result in no meaningful ownership stake, which translates to no meaningful revenues. It's important for the industry to have the state in on the deal because that creates alignment of interests, but I can't imagine the industry proceeding with a financially troubled partner.

This can be avoided if we get our financial house in order using tools we have at hand now.

Beyond the state's own need for revenues, having a gas project as a priority will stimulate more exploration for gas, which will inevitably result in more oil being found, and all this effectively extends the economic life of the North Slope petroleum industry. The best outcome is to have that and substantial revenues as well.

In the big picture a financially stable state government will help reinforce other Alaska industries like mining, seafood, tourism, aviation, construction, health care – almost everything, in fact.

There's a winning solution, and we can achieve it if we move soon.

Tim Bradner is a natural resources writer for the Alaska Journal of Commerce.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com

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